Mifid and Me: changing face of passporting

In the Treaty of Rome, two principles of freedom of financial services provision and freedom of establishment set the foundation for future policy development.

But it was not until 1986, when the Single European Act came into force, that key changes towards establishing a single market in financial services in the UK were developed.

This included the ‘passporting’ regime in 1993, after the 1989 Second Banking Directive, which allowed banks in the EU to set up branches or provide cross-border services freely in other member states without requiring the need for prior authorisation in the host state.

Passporting basically means that an authorised and regulated firm from one member state can carry out its permitted activities in another member state, either through setting up a branch in the country or providing cross-border services.

But despite being economically important, the UK must abide by EU legislation, with its national regulators - the Prudential Regulation Authority and Bank of England, and the Financial Conduct Authority - being responsible for implementing rules brought in by the European Union and supervising how firms comply with these rules.

When it came into force in 2007, the Markets in Financial Instruments Directive (Mifid) aimed to strengthen the single market for investment services and activities, thereby harmonising investor protection and increasing competition in EU financial markets.

It also created better regulation around passporting of services and products, making it potentially fairer for UK advisory firms to passport wealth management services across the Eurozone.

The changes due in Mifid II are likely to bring the requirements for advisers elsewhere in Europe closer to those of the UK Jason Porter

To do this, advisers must apply for a Mifid passport for advice on investments, such as shares and collective investment schemes.

In its six-page Factsheet 25: Investment Advisers - Passporting, the FCA has provided information for advisers wishing to advise clients who live in Europe.

The factsheet states: “The UK secured an opt out from Mifid for UK financial advisers but where a UK adviser is advising clients located in another European Economic Area (EEA) state, it must ensure it satisfies the legal requirements of that state.”

This applies whether clients are permanent or only temporary residents within Europe, and applies to different aspects of advice, whether investment or protection.

However, the credit crisis exposed flaws over transparency and reporting in the original Mifid regulations, which has led to greater scrutiny of the passporting regime.

The newest iteration - Mifid II, expected to come into force in 2018 - is bringing in greater transparency over disclosure on remuneration, reporting of transactions to regulators, better investor protection and stricter domestic and European supervisory practices and powers.

Double whammy

Currently, UK advisers with both domestic and EU clients suffer a “greater onus” than Europe-based advisers looking to passport into the UK, according to Jason Porter, director of Blevins Franks.

He says: “The effect of European and UK legislative changes is that in respect of activities undertaken in the UK, there is a difference in the requirements on UK advisers and those applying to advisers based elsewhere who use a European financial passport to provide financial advice in the UK.”

This is because any IFA - from Spain or Germany - can passport into the UK under the Freedom of Services or Freedom of Establishment rules (those originally encapsulated in the Treaty of Rome and subsequent legislation), and can be bound by their home regulator’s rules.

But Mr Porter says the UK home rule - under the Financial Conduct Authority - is tighter than in many other European countries.

However, as Mr Porter says: “There can be differences in the rules between the two jurisdictions. An example of this is the Retail Distribution Review, which places obligations on UK advisers that are not placed on advisers elsewhere, such as the charging model or disclosure.

“The changes due in Mifid II, however, are likely to bring the requirements for advisers elsewhere in Europe closer to those of the UK.”

This looks likely to mean a more level playing field between UK-based advisers and their European counterparts.

As Paul Stanfield, chief executive of the Federation of European IFAs, points out Mifid and the associated Insurance Distribution Directive (IDD) and the Packaged Retail Investment Products (Prips) regulation, will have less impact on UK advisers passporting out, than it will European advisers passporting in.

He explains: “While the RDR has affected the manner of delivering financial advice in the UK, the new EU directives and legislation - particularly Mifid II, IDD and Prips - will make a far greater impact on advisory services across the continent, not least due to the significantly increased transparency of remuneration that is involved.”

Prips

Associated to Mifid II is the Prips legislation, which addresses retail investor pre-contractual disclosure.

The Prips legislation requires all firms producing packaged retail investment products to draw up a key information document (KID), which must outline the key features, characteristics and risks of retail investment products, and be written in concise, clear and non-technical language.

The new proposed regulation of Prips now covers shares, interest-rate linked savings products, corporate debt and sovereign debt, financial instruments, bank term deposits and life insurance products.

Local authorities will have power to intervene if they think a provider is passporting something with an unclear KID.

The regulators can investigate new investment products before they are marketing, distributed or sold in any European jurisdiction.

However, AES International chief executive, Sam Instone, is sceptical of the full effect of Prips, given that some international clients will not benefit.

He says: “It was hoped that Prips II and Mifid II may improve the outcomes experienced by many international clients, although a small handful of offshore life insurance companies still perpetuate 1980s-style direct distribution, often enabling the bypassing of local regulatory requirements.”